A Complete Guide to Understanding Your Credit Score. Your credit score is an important factor in your financial life, whether you like it or not. Because so many things you are going to be doing in the future are going to be tiresome or directly linked to the current score.
If you have good credit, you can qualify for loans with low interest, amongst many other benefits. But first, you need to understand credit scores. That is why we are taking a look at the complete guide to understanding your credit score today.
A Complete Guide to Understanding Your Credit Score
You need to understand how credit cards work, how they are calculated, how they are relevant, and how to improve on them. So I urge you to stay focused on this article and read it to the end, not skipping any bits so that you get all the information you need to know to understand your credit score.
A Guide to Understanding Your Credit Score
The current score landscape is so complex and confusing that even a well-to-do financial person does not simply understand everything about credit scores. It can be difficult to know where to start or the first step to take in achieving strong credit or knowing the credit limit you have. which is one of the reasons this article is coming your way today.
So that by the end of this article, you can determine your credit score and everything you need to know to improve it. Therefore, without wasting any more time, let’s go ahead and jump in.
What is a Credit Score?
Your credit score is basically a three-digit number that describes how well or how badly your credit report is. The most important thing to remember here is that many lenders will take a look at your credit score in order to give you loans, credit cards, and other types of credit. This is why the head of your credit score needs to be taken into consideration on a monthly basis.
Your credit score is calculated by an algorithm that credit agencies use based on the information on your credit report or history. There are many scoring models that determine a person’s credit score. The most commonly used are the Fico score and VantageScore. The Fico score and vantage score are the credit score models that most lenders use, so these are the ones you need to keep an eye on.
What is a Credit Report?
A credit report is a data that comprises information that each credit bureau collects from lenders. There are many credit bureaus in the United States of America that produce credit reports for consumers. However, the major ones that are being used to produce the report in the USA are Equifax, Experian, and Transunion.
All the information in a case report is basically classified into three: credit history; credit inquiries, which is when you apply for a credit card; public records, and collections. Public records and collections include overdue debt from collections agencies and others.
How is a Credit Score Calculated?
The credit score is calculated based on several pieces of information on your credit report. All this information or data is collected by several credit bureaus. This is the information that the scoring agencies use in determining the credit score of an individual. Fico and VantageScore credit scores range from 300 to 850 and are determined by five major factors. The five major factors are listed and explained below.
Payment history: Your payment history is the single most important factor in determining your credit score. This is because it shows a lender whether you are likely to pay back a loan or not. If you are basically lied to about making payments, it is a negative thing on your credit report and will reduce your credit score and vice versa.
Credit utilization ratio: This is simply the percentage of your total credit limit that you use. Your credit utilization ratio should basically be below 30%, which means you should be using less than 30% of your overall credit limit. Having a high utilization ratio will lower your credit score.
Age of credit and established credit history: Having a long credit history of consistent on-time payments improves your credit score significantly. This is the length of time that your credit account has been open and you have been making consistent payments without fail.
Credit mix and number of accounts in use: Having many credit accounts that are open gives you better credit, and at the same time, having more accounts means you have been approved by different credit lenders. You need to have a diverse credit mix of credit across two main categories, which are our revolving credit and installment loans.
Hard credit inquiries and new credit: A hard inquiry is when someone like a lender or a credit card company pulls your credit report to check it. Having only one hard inquiry does not affect your credit report that much, but it stays on there for about 2 years.
Why is your Credit Score very Important?
Your credit score is very important because having a good credit score, which is usually between 658 and 719, means that you will have access to many loans, credit cards, and others with low-interest rates. It also determines if you are a good person to do business with. Generally, having a good credit score can open the doors to good opportunities for you.
There are many benefits or importance of having a good credit score Some of them are listed below:
- Gives you access to large ticket loans from traditional financial institutions.
- Makes it pretty easy for you to get a credit card.
- A good credit score is a good tool to help you get a great rate on a car loan.
- You will have access to all the best online loans possible.
- Gives you access to a more affordable insurance premium.
These are some of the benefits of having a good credit score, though this does not nearly cover everything. Now you have seen that it is very important to get a good credit score and you have seen some of the things you need to put in place so that you have a good credit score. All you basically have to do now is simply act according to what you have read in this article.
How can I read my credit score?
If you want to access your credit report, you can simply go to the three top credit reporting agencies, which are Equifax, Experian, and TransUnion. You can get a copy of your credit report from there or simply head over to annualcreditreport.com.
What should I look for when checking my credit report?
If you have not made use of your credit card for a long time, to be on the safe side, I need to monitor your credit report on a regular basis. To know if someone else is using your account information to commit fraud, you need to check for an unauthorized account. You can also check for the inactive status of your credit accounts, such as a closed account marked as open.
Also check to see if there is incorrect payment history, such as a current account labeled past due. After checking if there is any discrepancy, we can simply contact the reporting bureau to effect the change.